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Kraft Heinz’s Problems Run Deeper Than Its CEO

(Bloomberg Opinion) -- Kraft Heinz Co.’s problems stem not from a single manager but rather an ethos brought to the company by its private equity owner, 3G Capital, and championed by billionaire Warren Buffett. And so it remains to be seen whether replacing the packaged-food giant’s CEO is enough to right the ship.

Kraft Heinz announced on Monday that Bernardo Hees, 49, will step down on July 1 after a string of troubling developments in recent months. Last quarter, it took a $15.4 billion write-down, slashed its dividend and disclosed a subpoena from the U.S. Securities and Exchange Commission associated with an investigation into certain accounting policies. The setbacks point to an inherently flawed business strategy, one that is obsessed with cutting costs and deems debt-driven megamergers a better path to growth than investing more heavily in product innovation. The stock has lost more than 20 percent this year, hitting an all-time low in March. News of Hees’s pending departure lifted the price less than 1 percent on Monday afternoon.

To understand what ails Kraft Heinz, it’s helpful to explore how its managers and model are intertwined with 3G Capital, its second-largest shareholder. (Buffett’s Berkshire Hathaway Inc. owns a slightly bigger stake.) Hees is a partner at 3G and has been CEO of Kraft Heinz since the private equity firm merged the two food brands in 2015. Berkshire proudly backed that transaction, with Buffett writing in his annual letter at the time that the executives at 3G “could not be better partners,” though he finally admitted in February to overpaying for the deal. Hees also ran Heinz after it was taken private by 3G and Berkshire two years earlier, and he is the former CEO of Burger King’s parent, another 3G portfolio company.

His sucessor at Kraft Heinz will be Miguel Patricio, a longtime executive of Anheuser-Busch InBev NV, the world’s largest brewer. It’s yet another entity that has a long history with 3G and is known for adopting a similar approach to cutting costs and making deals. In fact, AB InBev is “still lumbering under” the debt from its $123 billion takeover of SABMiller in 2016, my colleague Andrea Felsted has written.

On the one hand, it may be that Patricio’s background is just what Kraft Heinz needs. At AB InBev, he was global chief marketing officer from 2012 to 2018, and he “has one of the best brand-building minds in the industry,” Marcel Herrmann Telles, a 3G founding partner who sits on Kraft Heinz’s board, said in the company’s press release on Monday. Kraft Heinz needs to turn its focus to reinvigorating its brands, some of which have been losing favor with millennials who want less-processed and more on-the-go foods from upstart businesses. But if the Budweiser parent is proof of Patricio’s success, it’s worth noting that the company is still struggling with many of the same challenges as Kraft Heinz: lots of debt, a dividend cut and a target customer more interested in craft beers.

The timing of the CEO announcement is also interesting given that Berkshire’s annual shareholder bash is next weekend in Omaha, where Buffett will surely be asked about Kraft Heinz’s troubles. In the past, he’s tried to explain away the seemingly hypocritical nature of investing alongside 3G, a culture that seems entirely contradictory to what Buffett has nurtured at Berkshire and has looked for in its holdings. Buffett is known to exalt leaders of the companies he invests in, so with Hees already on his way out from Kraft Heinz, it prevents a potentially awkward moment for the billionaire during the meeting. Also, with the Kraft Heinz CEO switch not taking effect until July, it shows that 3G sees the need for a change but not so quickly as to signal overwhelming urgency.

Amid February’s disastrous earnings report, Hees said, “We still believe in and strongly that our model is working.” 3G even looked in-house for its solution. Perhaps the private equity firm is failing to spot the problem: itself.

(Corrects timing of Miguel Patricio’s role as global chief marketing officer of Anheuser-Busch InBev NV in the fifth paragraph.)

To contact the author of this story: Tara Lachapelle at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.